The country's oil refineries have threatened to stop operation and to discontinue supply to the state owned oil supplier, Pakistan State Oil (PSO), if the government does not revise the pricing formula and fails to clear overdue payments within one month, official sources in Petroleum Ministry told Business Recorder.
This message has been conveyed by Adil Khattak, Chief Executive Officer, Attock Refinery (ARL), Ijaz Ali Khan, Chief Executive Officer, Pakistan Refinery (PRL), Zafar Haleem, President (Oil) of Bosicor Pakistan, Shuaib Malik, Chief Executive Officer of National Refinery (NRL), and Rasheed Jung, Managing Director of Pak-Arab Refinery, in a letter to the Minister for Privatisation and Petroleum, Naveed Qamar, sources said.
"We regret that serious issues confronting the refineries are not being duly addressed as a result of which the refineries are today almost on the verge of a financial collapse as their operations are no longer commercially viable and with no cash resources at hand, it is becoming increasingly difficult to even secure supplies of crude oil for processing," sources quoted the CEOs of all the refineries as saying in this letter.
Refineries have no funds to procure crude supplies, and each barrel of processed crude has a net negative margin of $3-6/barrel in case of most of the refineries. Consequently, the refineries cannot continue operations indefinitely.
The Government claims that the entire circular debt has been cleared. However, PSO continues to default to local refineries. The amount of overdues payable to refineries is being utilised by PSO to (i) either finance its increasing imports of petroleum products at the expense of the local refineries or (ii) these funds are being blocked as PSO's bad commercial debt. The refineries should not be penalised either way, sources quoted refineries CEOs as saying.
Despite refineries' warnings and year-long deliberations, the government has failed to address their grievances on the following major issues: (i) Revision of refineries pricing formula for ARL, NRL, PRL and Bosicor;(b) circular debt issue whereby the oil marketing companies (OMCs), mainly PSO, have continuously defaulted on their payments to the refineries; and (c) depletion of special reserves created for upgradation of projects and/or offsetting of operating losses.
Refineries claim that they have faced huge losses during 2008-09 and the first quarter of 2009-10 on account of arbitrary revisions made in the refineries' pricing formula over last two years. Refineries had been trying to emphasise that the pricing formula cannot and must not be considered in a short term perspective; rather long-term view of the issues should be taken.
The refineries have also claimed that overall financial condition and profitability has been seriously affected by adverse changes made in the refineries pricing formula and unfavourable fluctuations in the price of petroleum products and crude oil.
"We have observed that although the final recommendations made by the Petroleum Ministry to ECC in April, 2009 would, to a certain extent, alleviate the negative profitability of the refineries, it would still not completely pull out the refineries from a loss situation," the CEOs said.
The present system forces the country's hydro-skimming refineries to commercially compete with the imports from Arab Gulfs large deep conversion refineries without receiving any consideration for huge differentials in the respective cost of manufacturing and cost of doing business.
Refineries' profitability during last 15 month period has also been affected by the following two additional factors:
i) Negative impact of dollar-rupee exchange parity.
In the monthly price determination by Oil and Gas Regulatory Authority (Ogra) historical average of exchange rates prevailing in the previous months are applied to calculate the prices in Pak rupees. However, in case of payments to crude oil suppliers the exchange rate prevalent on the date of payment is used to calculate the amount payable in rupees and this time lag results in a negative impact on the refineries and needs to be resolved and incorporated in the recommendations for revision of pricing formula after considering various options to offset this negative impact.
ii) Change in Ogra price determination period from fortnightly basis to monthly basis.
The import parity prices for refineries, which were determined on fortnightly basis, were changed to monthly basis in January, 2009 whereas the crude oil pricing period in case of local supplies continues to be on weekly basis. This again has a negative impact on the refineries as in case of a rising trend of crude prices it is reflected in the product prices with a time lag.
To offset the negative impact arising from monthly determination of prices, refineries have proposed that the petroleum products price determination by Ogra be either brought in line with the weekly crude prices mechanism or at least reverted to the fortnightly pricing basis.
According to the refineries, circular debt is seriously impeding their smooth operations as the refineries have fully exhausted their cash reserves and borrowing limits (at a substantial cost).
Refineries CEOs' are also of the view that special reserves which were being accumulated as part of the pricing formula by transferring the profits in excess of 50% of paid-up capital as at 30th June, 2002 have fast depleted during the last 15 months. Due to this depletion of special reserves and uncertainty of profitability in future, the refineries are not in a position to undertake new projects for refinery upgradation/expansion or projects relating to production of environmental friendly products. This, however, does not apply to Parco as it is already at an advanced stage of diesel hydrodesulphurisation project.
"We would request the government that the issue of PSO defaulting in its payments to the refineries must be settled immediately but no later than 25th November, 2009, failing which the refineries will be constrained to discontinue/reduce supplies to PSO which would cause drastic disruption in supplies of petroleum products to the market," sources quoted refineries as conveying to the Petroleum Minister.
As regards revision in pricing formula, refineries argue that appropriate revision needs to be made in the pricing formula to ensure economic sustainability of the refineries and to give a fair return to the investors. This matter, according to refineries, also needs to be resolved as soon as possible but no later than 15th December, 2009.
"In case the two issues are not resolved at the earliest, the refineries will be left with no option but to either curtail or completely shut down their operations," sources quoted CEOs as saying with one voice.
Refineries have also put forth the argument that any action on their part would comprise strategic interests of the country in case the requirements for petroleum supplies have to be entirely dependent on imports.
This will also disrupt supplies of petroleum products to the civil market, defence establishments and power plants as well as suspension of crude upliftment from local crude oil fields which would either lead to their closure or export of local crude oil.
Enhanced or total import of petroleum products would further deplete valuable foreign exchange reserves of the country.